monthly journal of tax controversy contents …
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(201) 488-5400 Hackensack, NJ
Monthly Journal of Tax Controversy May 2017
www.agostinolaw.com
Representing Employers And/Or Employees In Employment Tax Controversies - How To Complete IRS Form SS-8 ····················· 1 Firm News ·······································21 Upcoming Events ······························22
Contents
NYCLA’s Litigation Before the USTC May 9 RSVP:conta.cc/2o9LRBF New York, NY Civil & Criminal Tax Penalties June 6 RSVP:conta.cc/2iWEfSV Hackensack, NJ International Tax Enforcement Update June 14 RSVP: conta.cc/2p7p1gM Paramus, NJ Agostino & Associates Summer BBQ June 14 RSVP:conta.cc/2p7p1gM Hackensack, NJ
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The Agostino & Associates Monthly Journal of Tax Controversy and many others have published articles on the recent increase in activity relating to the classification of service providers by employment lawyers, depart-ments of labor, and state and federal taxing authorities.2 See, e.g., “Common Tax Issues for Undocumented Immigrant Workers,” A&A Tax Controversy Journal (December 2014); “Federal Employment Misclassification,” ;Id.; “The Consequences of Misclassifying Em-ployees as Independent Contractors,” A&A Tax Controversy Journal (November 2014).
Most employment tax controversies involve the filing of IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Em-ployment Taxes and Income Tax Withhold-ing”3 by a worker or an employer. Many of our readers have commented that the “Instructions for Form SS-8” on the IRS.gov website4 do not provide enough guidance to the taxpayer or tax professional completing the form.
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REPRESENTING EMPLOYERS AND/OR EMPLOYEES IN EMPLOYMENT TAX CONTROVERSIES - HOW TO COMPLETE IRS FORM SS-8
By Frank Agostino, Esq. Caren Zahn, EA. Nicholas Karp, EA1
2
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forms the services, not only as to the result to be accom-plished by the work but also as to the details and means by which that result is accom-plished. That is, an employee is subject to the will and con-trol of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually di-rect or control the manner in which the services are per-formed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the per-son possessing that right is an employer. Other factors char-acteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is sub-ject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for ac-complishing the result, he is an independent contractor. An individual performing services as an independent contractor is not as to such services an employee under the usual common law rules. Individuals such as physicians, lawyers,
This article discusses the fact-finding a repre-sentative should conduct prior to completing the SS-8 and the implications of responses to each question asked.5
A. APPLICABLE STATUTE AND REGULA-TIONS
Before completing Form SS-8 the represen-tative should review the applicable statute, regulations and revenue rulings.
IRC § 3121(d)6 defines the term employee:
For purposes of this chapter, the term “employee” means—
(1) any officer of a corporation; or
(2) any individual who, under the usual common law rules applicable in determining the employer-employee relation-ship, has the status of an em-ployee; or . . .
26 CFR § 31.3121(d)-1(c)7 Common law em-ployees explains:
(1) Every individual is an em-ployee if under the usual com-mon law rules the relationship between him and the person for whom he performs ser-vices is the legal relationship of employer and employee.
(2) Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who per-
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as officers or directors, or portrayed as inte-gral to the business). The representative should consider how best to address such inconsistencies in the Form SS-8 submission.
Form SS-8 begins by asking the preparer to name the “firm (or person) for whom the worker performed services” and the “worker.” This article will identify these parties as the “firm” or the “employer” and the “worker” or the “service provider,” respectively.
C. FORM SS-8, PART I GENERAL INFOR-MATION
I.1: This form is being com-pleted by: □ Firm □ Worker; for services performed [beginning date] to [ending date].
The IRS statute of limitations is usually three years to audit or make an employment tax assessment. Absent an exception set forth in IRC § 6501, the IRS cannot make an employ-ment tax determination for a tax year after the statute of limitations has expired. Conse-quently, a representative completing a Form SS-8 on behalf of a firm should only list the last three years in which services were per-formed.
By contrast, the statute of limitations for a worker to file a claim for damages pursuant to IRC § 7434 is six years. A tax professional representing a worker should therefore in-clude the entire period the worker performed services for the firm.
dentists, veterinarians, con-struction contractors, public stenographers, and auction-eers, engaged in the pursuit of an independent trade, busi-ness, or profession, in which they offer their services to the public, are independent con-tractors and not employees.
(3) Whether the relationship of employer and employee exists under the usual com-mon law rules will in doubt-ful cases be determined upon an examination of the particular facts of each case. (Emphasis added.)
In those “doubtful cases,” the IRS identifies twenty factors relevant to whether a worker is an employee under the common law. The degree of importance of each factor varies depending on the occupation and the factual context in which services are performed. See Rev. Rul. 87-41.8
B. FACT-GATHERING AND ASSESSMENT
Prior to completing Form SS-8, the represen-tative should review the parties’ websites, if any, and any information reports filed with the taxing authorities, departments of labor, and insurance companies during the relevant period. The representative should know if the worker has (or had) an email address on the firm’s domain.
The IRS will review such information for ad-missions and facts inconsistent with the cli-ent’s position (e.g. independent contractor status for workers listed on the firm’s website
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common law employee.
By contrast, “Bid” suggests the service pro-vider is an independent contractor.
I.5: Attach copies of all sup-porting documentation (for example, contracts, invoices, memos, Forms W-2 or Forms 1099-MISC issued or received, IRS closing agree-ments or IRS rulings). In ad-dition, please inform us of any current or past litigation concerning the worker’s status. If no income report-ing forms (Form 1099-MISC or W-2) were furnished to the worker, enter the amount of income earned for the year(s) at issue. If both Form W-2 and Form 1099-MISC were issued or received, explain why.
The first step the representative should take before providing this information is to get IRS transcripts verifying whether (1) any Forms 1099 or W-2 were filed, and (2) the IRS has audited the firm previously.
If the IRS has examined the firm in the past, the representative should file a Freedom of Information Act (FOIA)10 request for the ad-ministrative file pertaining to the examination.
If IRS forms consistent with the taxpayer’s contention were not timely filed, consider whether to amend existing IRS filings before submitting the Form SS-8.
I.2: Explain your reason(s) for filing this form (for ex-ample, you received a bill from the IRS, you believe you erroneously received a Form 1099 or Form W-2, you are unable to get workers’ compensation benefits, or you were audited or are be-ing audited by the IRS).
If Form SS-8 is being filed in connection with an IRS Form 211, “Application for Award for Original Information,” the representative should cross-reference the Form 211 here and request that the IRS technician process-ing the SS-8 follow procedures for cases re-ferred to the criminal investigation division.9
I.3: Total number of work-ers who performed or are performing the same or similar services.
The more workers performing the same or similar services, the greater the potential tax resulting from reclassification.
Consequently, when completing the SS-8 for the firm, the representative should, to the ex-tent possible, differentiate services provided by each category of worker.
I.4: How did the worker ob-tain the job? The appropri-ate box should be checked:
□ Application □ Bid □ Em-ployment Agency □ Other (specify).
Answering “Application” or “Employment Agency” suggests the service provider is a
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This question is relevant to the permanency of the relationship between the firm and the worker. Businesses generally do not give change of control benefits to independent contractors.
By contrast, the lack of these types of bene-fits does not necessarily mean the worker is an independent contractor.
I.8: Describe the work done by the worker and provide the worker’s job title.
The key to this question is whether and/or how the firm directs or controls the work and the worker. Note here that control is a matter of degree: independent contractors are con-strained in some ways and employees have autonomy in some areas.
A worker is an employee when the business has the right to direct and control the worker (even if that right is infrequently or never ex-ercised). The critical test is whether the busi-ness could exercise such control if it chose to.
A title suggests that there is a degree of per-manency in the relationship. If a business engages a worker with the expectation that the relationship will continue indefinitely – rather than only for the duration of a specific project or period – the IRS may conclude that the parties intended to create an employer-employee relationship.
Some titles are almost issue determinative. For example, IRC § 3121(d) includes in its definition of employee: “(1) any officer of a corporation.” Generally, an officer of a corpo-ration is an employee of the corporation.
I.6: Describe the firm’s business.
The answer will be used to evaluate whether the worker is or is not integral to the business. Of course, the description should be consis-tent with the firm’s website and promotional materials.
Rev. Rul. 87-41 provides:
When the success or con-tinuation of a business de-pends on the performance of services, the workers who per-form those services are, more likely than not, subject to con-trol by the business.
When work is integral to the business, it is more likely that the worker is an employee. By contrast, work that is temporary and non-integral may imply independent contractor status.
I.7: If the worker received pay from more than one en-tity because of a sale, merger, acquisition, or reor-ganization of the form for whom the services are per-formed, provide the follow-ing: Name of the firm’s pre-vious owner; Previous owner’s tax identification number.
Change was a: □ Sale □ Merger □ Acquisition □ Re-organization
□ Other (specify). Descrip-tion of above change:
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This is an opportunity for the representative to make the case for the client’s desired cate-gorization as independent contractor or em-ployee. Generally, the representative at-taches an analysis of the 20-factor test set forth in Rev. Rul. 87-41. The most persua-sive attachments reference IRS Rulings and recent cases, drawing parallels to or distin-guishing appropriate facts.
I.10: Did the worker perform services for the firm in any capacity before providing the services that are the subject of this determina-tion request? □ Yes □ No □ N/A. If “Yes,” what were the dates of the prior service? If “Yes,” explain the differ-ences, if any, between the current and prior service.
Rev. Rul. 87-41 provides:
A continuing relationship be-tween the worker and the per-son or persons for whom the services are performed indi-cates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring al-though irregular intervals.
Firms sometimes lay off employees and re-hire them under an alternative arrangement (i.e., the former employee is classified as an independent contractor). If a firm rehires a laid-off employee as an independent contrac-tor without otherwise restructuring the sub-
By contrast, 26 CFR § 31.3121(d)-1(a)(3) provides:
However, an officer of a cor-poration who as such does not perform any services or per-forms only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an em-ployee of the corporation. A director of a corporation in his capacity as such is not an em-ployee of the corporation.
Finally, 26 CFR § 31.3121(d)-1(a)(3) empha-sizes the substance of the relationship over its nominal form:
If the relationship of employer and employee exists, the des-ignation or description of the relationship by the parties as anything other than that of em-ployer and employee is imma-terial. Thus, if such relation-ship exists, it is of no conse-quence that the employee is designated as a partner, coad-venturer, agent, independent contractor, or the like.
A representative should review the answer to this question after answering the behavioral control questions in Part II.
I.9: Explain why you believe the worker is an employee or an independent contrac-tor.
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pendent contractor classification should em-phasize those sections of the agreement:
1. Requiring the contrac-tor to submit invoices (ideally with terms and timing compa-rable to other outside vendors).
2. Requiring the contrac-tor to pay travel or other busi-ness expenses directly.
3. Requiring the contrac-tor to treat the relationship with the company as an inde-pendent contractor relation-ship for all purposes of the Internal Revenue Code and applicable state tax laws.
4. Requiring the contrac-tor to report on federal and state income tax returns all income received pursuant to the contract as income re-ceived from a trade or busi-ness subject to self-employment tax.
5. Requiring the contrac-tor to pay all federal self-employment taxes shown on the federal income tax return that are attributable to the con-tract.
6. Requiring the contrac-tor, upon the company’s re-quest, to complete and sign IRS Form 4669,11 “Statement of Payments Received.”
stance or pattern of work performed, the IRS will consider the worker an employee.
A representative advocating for an independ-ent contractor determination should thor-oughly explore the differences between the worker’s current and prior service.
I.11: If the work is done un-der a written agreement be-tween the firm and the worker, attach a copy (preferably signed by both parties). Describe the terms and conditions of the work arrangement.
A contract stating that the worker is an independent con-tractor or an employee is not determinative of the worker’s status. However, the IRS and the courts often look at con-tracts to determine the intent of the parties. Stated another way, a written agreement de-scribing the worker as an inde-pendent contractor can be relevant to the parties’ intent. The contract also is pertinent in ascertaining methods of compensation, expenses that will be incurred, and the rights and obligations of each party regarding how work is to be performed.
Businesses should evaluate independent contractor agreements and draw the exam-iner’s attention to the factors the IRS views as relevant to the desired classification. Spe-cifically, a representative advocating for inde-
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vices performed in a particular method or manner. See Rev. Rul. 70-630, 1970-2 C.B. 229.
Independent contractors rely on their own methods, training and experience rather than those of the business. By contrast, an em-ployee will likely be trained to perform ser-vices in a particular manner according to the company’s practices.
As to instructions, Rev. Rul. 87-41 provides:
INSTRUCTIONS. A worker who is required to comply with other persons’ instructions about when, where, and how he or she is to work is ordinar-ily an employee. This control factor is present if the person or persons for whom the ser-vices are performed have the RIGHT to require compliance with instructions. See, for ex-ample, Rev. Rul. 68-598, 1968-2 C.B. 464, and Rev. Rul. 66-381, 1966-2 C.B. 449.
More detailed instructions indicate that the worker is an employee. Less detailed in-structions reflect less control, indicating that the worker is more likely an independent con-tractor. Stated another way, if a worker is subject to instructions about when, where and how to conduct an assigned task, he or she is likely an employee.
7. Requiring the contactor to indemnify and hold harm-less the company for all fed-eral and state withholding and employment taxes that the company pays with respect to the agreement.
D. FORM SS-8, PART II BEHAVIORAL CONTROL
The questions in Part II explore those as-pects of the working relationship pertinent to 26 CFR § 31.3121(d)-1(c)(2), which provides that the relationship of employer-employee exists when the person for whom the ser-vices are performed can direct and control the individual who performs the services not only as to the result to be accomplished but also as to the details and means by which that result is accomplished.
II.1: What specific training and/or instruction is the worker given by the firm?
This question bears on whether the business has retained the right to specify the details of a worker’s performance.12
Rev. Rul. 87-41 explains:
TRAINING. Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods, indi-cates that the person or per-sons for whom the services are performed want the ser-
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subject to the control or direc-tion of another merely as to the result to be accomplished by the work and not as to the means and methods for ac-complishing the result, he is not an employee.
When answering this question, a representa-tive should identify the facts relevant to the desired classification.
II.4: Who is the worker re-quired to contact if prob-lems or complaints arise and who is responsible for their resolution?
How the worker addresses “problems” and “complaints” is relevant as to whether the worker is subject to the control or direction of the firm as to means and methods for accom-plishing the result.
An independent contractor would be respon-sible for problems and complaints and their resolution.
By contrast, a worker reports complaints or problems to the employer and the employer controls the resolution of any issues.
II.5: What types of reports are required from the worker? Attach examples.
The reports, if any, required from the worker are indicative of the level of the firm’s control and direction of the means and methods for accomplishing the result.
Rev. Rul. 87-41 explains:
II.2: How does the worker receive work assignments?
II.3: Who determines the methods by which the as-signments are performed?
These questions are designed to elicit the facts needed to determine whether the worker is subject to the control or direction of the firm as to either (a) the result to be ac-complished by the work and/or (b) the means and methods for accomplishing the result.
Rev. Rul. 87-41 explains:
ORDER OR SEQUENCE SET. If a worker must perform ser-vices in the order or sequence set by the person or persons for whom the services are per-formed, that factor shows that the worker is not free to follow the worker’s own pattern of work but must follow the es-tablished routines and sched-ules of the person or persons for whom the services are per-formed. Often, because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the ser-vices or set the order infre-quently. It is sufficient to show control, however, if such per-son or persons retain the right to do so.
By contrast, 26 CFR § 31.3401(c)-1 provides:
In general, if an individual is
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other hand, is free to work when and for whom he or she chooses.
An employee is generally subject to the busi-ness’s instructions about when, where, and how to work.
II.7: At what location(s) does the worker perform services (for example, firm’s prem-ises, own shop or office, home, customer’s location)? Indicate the appropriate per-centage of time the worker spends in each location, if more than one.
Rev. Rul. 87-41 provides:
DOING WORK ON EM-PLOYER’S PREMISES. If the work is performed on the premises of the person or per-sons for whom the services are performed, that factor sug-gests control over the worker, especially if the work could be done elsewhere. . . . Work done off the premises of the person or persons receiving the services, such as at the office of the worker, indi-cates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the ex-tent to which an employer
ORAL OR WRITTEN RE-PORTS. A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a de-gree of control.
The answer to this question should attach the reports and evaluate whether the reports are in the nature of status reports (employee) or invoices (independent contractor).
II.6: Describe the worker’s daily routine such as his or her schedule or hours.
The worker’s daily routine is relevant to whether the worker is subject to the control or direction of the firm as to means and meth-ods for accomplishing the result. Here, Rev. Rul. 87-41 explains:
SET HOURS OF WORK. The establishment of set hours of work by the person or persons for whom the services are per-formed is a factor indicating control.
FULL TIME REQUIRED. If the worker must devote substan-tially full time to the business of the person or persons for whom the services are per-formed, such person or per-sons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An inde-pendent contractor on the
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Training a worker by . . . re-quiring the worker to attend meetings . . . indicates that he person or persons for whom the services are performed want the services performed in a particular method or manner.
With respect to meetings, the representative should evaluate:
(a) Is the worker’s attendance mandatory?
(b) Is the worker compensated for attending?
(c) Is the worker penalized for not attending?
A “yes” answer to these questions indicates a level of control suggestive of an employer-employee relationship.
II.9: Is the worker required to provide the services per-sonally?
□ Yes □ No
Rev. Rul. 87-41 provides:
SERVICES RENDERED PER-SONALLY. If the Services must be rendered personally, presumably the person or per-sons for whom the services are performed are interested in the methods used to ac-complish the work as well as in the results.
By contrast, in many instances, the inde-pendent contractor is an employee of his or her corporation or a limited liability company.
generally would require that employees perform such ser-vices on the employer’s prem-ises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as re-quired. (Emphasis added.)
26 CFR § 31.3401(c)-1(b) provides:
Other factors characteristic of an employer, but not neces-sarily present in every case, are the furnishing of tools and the furnishing of a place to work to the individual who per-forms the services.
Requiring the worker to perform services at the firm’s location permits an inference that the firm has the right to direct or control how the worker does the work.
II.8: Describe any meetings the worker is required to at-tend and any penalties for not attending (for example, sales meetings, monthly meetings, staff meetings).
A requirement that workers attend meetings or training in the firm’s procedures and meth-ods is evidence of an employer-employee relationship.
Rev. Rul. 87-41 provides:
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suant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attain-ment of a result, this factor indicates an independent con-tractor status.
REALIZATION OF PROFIT OR LOSS. A worker who can realize a profit or suffer a loss as a result of the worker’s ser-vices (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. For example, if the worker is subject to a real risk of economic loss due to sig-nificant investments or a bona fide liability for expenses, such as salary payments to unre-lated employees, that factor indicates that the worker is an independent contractor. The risk that a worker will not re-ceive payment for his or her services, however, is common to both independent contrac-tors and employees and thus does not constitute a sufficient economic risk to support treat-ment as an independent con-tractor.
A worker’s ability to hire, supervise, pay and profit from the work of assistants suggests the worker is an independent contractor.
If the service provider is providing services through an entity, the answer to this question should focus on whether (a) corporate for-malities are properly followed and (b) at least one non-tax business purpose exists for the worker’s incorporation.
II.10: If substitutes or help-ers are need, who hires them?
II.11: If the worker hires the substitute or helpers, is ap-proval required? If “Yes,” by whom?
II.12: Who pays the substi-tutes or helpers?
II.13: Is the worker reimbursed if the worker pays the substitutes or helpers? □ Yes □ No If “Yes,” by whom?
These questions are grouped because they require an analysis of whether the control of the assistants creates an inference that the services are provided by a business inde-pendent of the firm.
Rev. Rul. 87-41 suggests the following fac-tors are relevant to the analysis:
HIRING, SUPERVISING, AND PAYING ASSISTANTS. If the person or persons for whom the services are performed hire, supervise, and pay assis-tants, that factor generally shows control over the work-ers on the job. However, if one worker hires, supervises, and pays the other assistants pur-
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tence of an employer-employee relationship.
SIGNIFICANT INVESTMENT. If the worker invests in facili-ties that are used by the worker in performing services and are not typically main-tained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent con-tractor. On the other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship. . .. Special scrutiny is required with respect to certain types of facilities, such as home offices.
An independent contractor often has a sub-stantial investment in the facilities and sup-plies used in performing services for a busi-ness and will purchase and/or lease the tools and equipment critical to the successful com-pletion of a task, such as computers or other specialized equipment.
An employee will have a more casual invest-ment in the supplies used to perform duties.
E. FORM SS-8, PART III FINANCIAL CON-TROL
The financial control questions focus on whether and to what extent the business di-rects or controls the financial factors of a worker’s business-related activities. The more control a business has over those fi-nancial factors, the more likely the worker is an employee and not an independent con-tractor.
III.1: List the supplies, equipment, materials, and property provided by each party:
The firm:
The worker:
Other party:
III.2: Does the worker lease equipment, space, or a facil-ity?
□ Yes □ No If “Yes,” what were the terms of the lease? (Attach a copy or explana-tory statement.)
Rev. Rul. 87-41 suggests the following fac-tors are relevant to the financial control analysis:
FURNISHING OF TOOLS AND MATERIALS. The fact that the person or persons for whom the services are per-formed furnish significant tools, materials, and other equip-ment tends to show the exis-
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III.5: Type of pay the worker receives: □ Salary □ Com-mission
□ Hourly Wage □ Piece Work □ Lump Sum □ Other (specify).
If type of pay is commission, and the firm guarantees a minimum amount of pay, specify amount.
III.6. Is the worker allowed a drawing account for ad-vances?
□ Yes □ No If “Yes,” how often? Specify any restric-tions.
Rev. Rul. 87-41 explains:
PAYMENT BY HOUR, WEEK, MONTH. Payment by the hour, week, or month generally points to an employer-employee relationship, pro-vided that this method of pay-ment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on straight commission generally indicates that the worker is an independent con-tractor.
A worker is considered an employee if paid a specified wage for a certain period, such as on an hourly or weekly basis. This is true even if the employee also receives a bonus
III.3. What expenses are in-curred by the worker in the performance of services for the firm?
III.4. Specify which, if any expenses are reimbursed by:
The firm:
Other party:
With respect to expenses, Rev. Rul. 87-41 suggests the following analysis:
PAYMENT OF BUSINESS AND/OR TRAVELING EX-PENSES. If the person or per-sons for whom the services are performed ordinarily pay the worker’s business and/or traveling expenses, the worker is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker’s business activi-ties.
Businesses often pay business or travel ex-penses for their employees. Independent contractors may contract for direct reimburse-ment of certain expenses or may seek to en-ter agreements that will reimburse them for out-of-pocket expenses.
The answer to this question should focus on the liability and potential for unreimbursed expenses. Independent contractors are more likely to have the potential for loss rela-tive to unreimbursed expenses.
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realize a profit or suffer a loss as a result of the worker’s ser-vices (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. . .. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that fac-tor indicates that the worker is an independent contractor. The risk that a worker will not receive payment for his or her services, however, is common to both independent contrac-tors and employees and thus does not constitute a sufficient economic risk to support treat-ment as an independent con-tractor.
If the customers pay the worker, the worker is an independent contractor. If the customer pays the firm, the worker is an employee. Likewise, a worker passing the entire amount collected from customers on to the firm is an employee.
A worker who bears the risk for equipment damage is more likely to be an independent contractor, while a worker who is guaranteed reimbursement for loss (or doesn’t own any equipment) is more likely an employee.
Similarly, an independent contractor will usu-ally set his or his own payments. If the firm
or commissions and can draw against com-missions.
By contrast, independent contractors are (a) paid a flat fee per job, (b) not entitled to ad-vances or draws, and (c) not eligible for bo-nuses, pensions, or sick pay.
It should be noted, however, that in some fields (e.g., attorneys, accountants, consult-ants) hourly pay rates have become common and accepted; for those fields hourly com-pensation will not imply employee status.
III.7. Whom does the cus-tomer pay? □ Firm □ Worker.
If worker, does the worker pay the total amount to the firm?
□ Yes □ No If “No,” explain.
III.9. What economic loss or financial risk, if any, can the worker incur beyond the normal loss of salary (for example, loss or damage of equipment, material)?
III.10. Does the worker es-tablish the level of payment for the services provided or the products sold? □ Yes □ No If “No,” who does?
For all three questions, the real issue is the extent to which the worker can realize a profit or loss. Rev. Rul. 87-41 provides:
REALIZATION OF PROFIT OR LOSS. A worker who can
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Insurance benefits □ Bonuses
□ Other (specify)
Businesses typically offer employees benefits such as paid vacation days, paid sick days, health insurance, life or disability insurance, or a pension. Independent contractors gener-ally do not receive any type of employment benefits from the client, however.
If an employer provides benefits to an inde-pendent contractor, the representative should review the documents creating the benefit plan and ensure that benefits are available to independent contractors. Many tax-qualified retirement plans, IRC § 403(b) annuities, or cafeteria plans, can only be provided to em-ployees.
IV.2: Can the relationship be terminated by either party without incurring liability or penalty?
Rev. Rul. 87-41 explains:
RIGHT TO DISCHARGE. The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer ex-ercises control through the threat of dismissal, which causes the worker to obey the employer’s instructions. An independent contractor, on the other hand, cannot be fired so long as the independent con-tractor produces a result that
sets the payment terms, the worker may be an employee.
The key to this analysis is the worker’s ability to earn a profit and whether that profit is tied to the success of the firm. An independent contractor stands to make a profit or loss based on success in completing a project cost-effectively, regardless of the ultimate profit of the firm for whom the project is per-formed.
Employees do not risk a profit or loss, based upon the success of the work. Instead, bo-nus payments may be based on the success of the firm.
III.8. Does the firm carry worker’s compensation in-surance on the worker? □ Yes □ No
New Jersey law requires that all New Jersey employers have workers’ compensation cov-erage for their employees. If workers’ com-pensation insurance is provided by the firm, the worker is an employee. Independent con-tractors provide their own insurance. Other states have similar guidelines that create at least a presumption of a particular classifica-tion.
F. FORM SS-8, PART IV RELATIONSHIP OF THE WORKER AND FIRM
IV.1: Please check the benefits available to the worker:
□ Paid vacations □ Sick pay
□ Paid holidays
□ Personal days □ Pensions □
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same service arrangement.
MAKING SERVICE AVAIL-ABLE TO GENERAL PUBLIC. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor re-lationship. See Rev. Rul. 56-660.
Individuals such as physicians, lawyers, den-tists, veterinarians, construction contractors, public stenographers, and auctioneers, en-gaged in the pursuit of an independent trade, business, or profession, in which they offer their services to the public, are independent contractors and not employees.
IV.4: Describe any agree-ments prohibiting competi-tion between the worker and the firm while the worker is performing services or dur-ing any later period. Attach any available documenta-tion.
An independent contractor is in business in-dependently. Consequently, an independent contractor is generally free to perform similar services for multiple companies at the same time and to provide similar services to others upon completion of a project. By contrast, a firm’s requirement that a service provider limit other sources of income in a non-compete agreement suggests a higher level of control exercised by an employer over an employee.
If the services provided are so integral13 to a
meets the contract specifica-tions. Rev. Rul. 75-41, 1975-1 C.B. 323.
RIGHT TO TERMINATE. If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incur-ring liability, that factor indi-cates an employer-employee relationship. See Rev. Rul. 70-309.
Generally, the parties’ ability to terminate their relationship without incurring liability or penalty suggests that the service provider will be considered an employee.
IV.3: Did the worker perform similar services for others during the time period en-tered in Part 1, line 1?
Rev. Rul. 87-41 explains:
WORKING FOR MORE THAN ONE FIRM AT A TIME. If a worker performs more than de minimis services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent con-tractor. See Rev. Rul. 70-572, 1970-2 C.B. 221. However, a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the
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Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of supplies and detailed speci-fications to the individual who performs the services.
Rev. Rul. 87-41 explains:
FURNISHING OF TOOLS AND MATERIALS. The fact that the person or persons for whom the services are per-formed furnish significant tools, materials, and other equip-ment tends to show the exis-tence of an employer-employee relationship.
SIGNIFICANT INVESTMENT. If the worker invests in facili-ties that are used by the worker in performing services and are not typically main-tained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent con-tractor. On the other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship. Special scrutiny is required with re-spect to certain types of facili-ties, such as home offices.
business that a non-compete is the only ef-fective means available to protect the firm’s business interests, the IRS will infer that the service provider is not engaged as an inde-pendent enterprise, rather as an employee.
IV.5: Is the worker a member of a union?
State and federal laws allow employees to join or form unions. An independent contrac-tor is not necessary entitled to join or form a union. Union membership suggests that the service provider is an employee.
IV.6: What type of advertis-ing, if any, does the worker do (for example, a business listing in a directory or busi-ness cards)?
Rev. Rul. 87-41 explains:
MAKING SERVICE AVAIL-ABLE TO GENERAL PUBLIC. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor re-lationship. See Rev. Rul. 56-660.
Advertising products and services with a business listing and/or with business cards may indicate independent contractor status.
IV.7: If the worker assem-bles or processes a product at home, who provides the materials and instructions or pattern?
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not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an em-ployee of the corporation.
By contrast, 26 CFR § 31.3121(d)-1(a)(3) provides that if the relationship of employer and employee exists, the designation or de-scription of the relationship by the parties as anything other than that of employer and em-ployee is immaterial.
A worker performing services under the worker’s own name or business name and who has an employer identification number, indicates an independent contractor.
Filing a Form W-2 usually indicates the par-ties’ belief that the worker is an employee.14
IV.10: If the worker no longer performs services for the firm, how did the rela-tionship end (for example, worker quit or was fired, job completed, contract ended, firm or worker went out of business)?
26 CFR § 31.3121(d)-1 provides in part:
The right to discharge is also an important factor indicating that the person possessing that right is an employer.15 The right to discharge a worker indicates that the worker is an employee and the
If the worker assembles or processes a prod-uct at home, the worker may still be an em-ployee, unless the worker provides tools, sources materials and procedural details, or has other significant investment in the activity.
IV.8: What does the worker do with the finished product (for example, return it to the firm, provide it to another party, or sell it)?
Per Rev. Rul. 87-41:
3. Integration. Integration of the worker’s services into the business operations generally shows that the worker is subject to direction and con-trol.
When the success or continuation of a busi-ness depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
IV.9: How does the firm rep-resent the worker to its cus-tomers (for example, em-ployee, partner, representa-tive, or contractor) and un-der whose business name does the worker perform these services?
26 CFR § 31.3121(d)-1 provides in part:
(b) Corporate officers. Gener-ally, an officer of a corporation is an employee of the corpora-tion. However, an officer of a corporation who as such does
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2. Settle, pursuant to the Classification Set-tlement Program (CSP),19 which allows firms under examination to resolve worker classification cases during the ad-ministrative process.
3. Pursue Section 530 relief.
4. Litigate an unfavorable determination in the Tax Court pursuant to IRC § 7436.20
5. Bring suit against the employer firm under IRC § 7434.
person possessing the right is an employer.15 A employer exercises control through the threat of dismissal, which causes the worker to obey the employer’s instructions. Simi-larly, the right of the worker to unilaterally terminate the rela-tionship with the firm at any time is an indication of an em-ployment relationship.16 A con-tinuing relationship between a worker and the person or per-sons for whom the services are performed is an indication of an employment relation-ship.17
By contrast, an independent contractor can-not be fired if the result meets contract speci-fications. The relationship ends when the contracted services are completed. Note however, independent contractors may enter into short-term contracts for which nonper-formance remedies are inappropriate or may negotiate limits on their liability for nonper-formance. For example, professionals, such as doctors and attorneys, are typically able to terminate their contractual relationship with-out penalty.
CONCLUSION
The goal of this article is to provide guidance on the preparation of Form SS-8. An upcom-ing article in the A&A Tax Controversy Jour-nal will address what to do after completing the Form, including whether to:
1. Enter into the Voluntary Classification Settlement Program (VCSP).18
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Footnotes: 1. Frank Agostino is Principal of, and Caren Zahn
and Nicholas Karp are Enrolled Agents at Agostino and Associates, P.C.
2. Employee vs. independent contractor determina-tion is relevant to: (1) whether an individual is liable for the employee’s share of the FICA tax; (2) whether business expenses must be itemized, subject to the 2 percent floor on miscellaneous itemized deductions of IRC § 67, or are subject to the adjusted gross income additions of IRC § 62(c) and the itemized deduction limitation of IRC § 68; (3) whether a firm’s qualified pension plan must treat the worker as an employee for qualification purposes; (4) whether an individual has a right to continuing health care coverage for purposes of Consolidated Omnibus Reconciliation Act of 1986, P.L. 99-272 (COBRA); (5) availability of coverage under, or liability for, unemployment and workers’ compensation benefits, (6) applicability of federal and state laws regulating minimum wage and over-time pay, and (7) applicability of the Americans with Disabilities Act (requiring employers to make special accommodations for disabled employees).
The Internal Revenue Code (“IRC”) punishes an employer who misclassifies an employee as an in-dependent contractor. For example, IRC § 6656 penal-izes an employer who fails to deposit taxes that the employer was obligated to withhold. IRC § 6721 penal-izes an employer for filing a Form 1099 instead of a Form W-2. 3. https://www.irs.gov/pub/irs-pdf/fss8.pdf 4. https://www.irs.gov/pub/irs-pdf/iss8.pdf 5. The IRS has released its training guide for agents on worker classification issues. Independent Contractor or Employee? Training Materials, Training 3320-102 (10-96) TPDS 84238. http://www.sjsu.edu/people/annette.nellen/website/IRS_TrainingMaterials_ECorEmployee_1996.pdf 6. See also IRC §§ 3306(a)(1), 3306(c), and 3401(d). 7. See also 26 CFR § 31.3306(i)-1(b) and 31.3401(c)-1(b). 8. Rev. Rul. 87-41, 1987-1 C.B. 296. 9. See e.g., IRM 7.50.1.5.3 (08-19-2016), “Processing Form SS-8 Cases with Open Audit, Appeals, or Crimi-nal Investigation Involvement.” Notwithstanding the “Disclosure of Information” warning at the start of the Form SS-8, the IRS has procedures in place to protect whistle blowers. The IRS will treat whistle blower infor-mation as highly confidential and keep all documents secure and concealed. IRM 25.2.1.2 (12-23-2008) Dis-closure/Security Procedures. 10. The taxpayer’s rights under the FOIA are explained at https://www.irs.gov/uac/irs-freedom-of-information. It should be noted that IRM 11.3.13.9.5 (08-14-2013),
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SS-8 (Determination of Worker Status) Requests provides:
FOIA requests may be received from unrelated third par-ties for Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, or for written determinations concerning Form SS-8. Such requesters will be advised that Form SS-8 does not fall within the auspices of the FOIA, but rather IRC § 6110. If they wish to pursue their request for Form SS-8, they must make an IRC § 6110 request. See also IRM 11.3.8.8, Written Determinations, for addit ional information. (Emphasis added.)
11. IRC § 3402 lets an employer reduce tax liability if it can show the workers whom it labeled independent contractors paid income tax on their earnings. See, e.g. Mescalero Apache Tribe v. Commissioner, 148 T.C. No. 11. 12. See also 26 CFR § 31.3402(d)-1. Consequently, best practice in agreement drafting is to include a provision requiring each worker to complete IRS Form 4669, “Statement of Payments Received.” IRM 4.23.8.4 (Oct. 26, 2015). 13. 26 CFR § 31.3121(d)-1(c)(2) provides, “it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. . .” 14. Stated another way, are the worker’s services an integral part of the business of the employer? 15. It should be noted that workers have succeeded in obtaining independent contractor status even when Forms W-2 were filed. See e.g., Quintanilla v. Commissioner, T.C. Memo 2016-5; Butts v. Commis-sioner, T.C. Memo 1993-478, aff’d per curiam 49 F.3d 713 (11th Cir. 1995). 16. Rev. Rul. 75-41, 1975-1 C.B. 323. 17. Rev. Rul. 70-309, 1970-1 C.B. 199. 18. United States v. Silk, 331 U.S. 704 (1947). 19. VCSP is an IRS program that provides firms with an opportunity to reclassify their workers as employ-ees for future tax periods. 20. The CSP allows firms under examination to re-solve worker classification cases during the adminis-trative process.
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FIRM NEWS Agostino & Associates is happy to welcome Nicholas Karp, our third IRS Enrolled Agent on staff, and Nache Patoir, our new law clerk. Nicholas has an MBA in professional accounting, is newly admitted to the United States Tax Court (having passed the non-attorney exam, no less!), and is a Certified Fraud Examiner (CFE). He passed the Certified Financial Planner exam and the Massachusetts CPA exam and is awaiting those designations. Nache is a graduate of the Touro College Law Center and Hofstra University and is pending admission to the New York State bar. Agostino & Associates also proudly an-nounces its 2017 Summer Thank You BBQ on June 14, 2017. More food truck merri-ment and hopefully one or two new twists. Please take a look at our invitation flyer and let us know if you can make it!
All Calendar Calls Are Held at: Jacob K. Javits Federal Building
26 Federal Plaza Rooms 206, 208
New York, NY 10278
September 25, 2017
October 23, 2017 November 13, 2017 November 27, 2017 December 04, 2017
AGOSTINO & ASSOCIATES, P.C. CONTACT INFORMATION
(201) 488-5400
Frank Agostino, Esq. Ext. 107 [email protected] Phillip Colasanto Ext. 105 [email protected] Jeffrey Dirmann, Esq. Ext. 119 [email protected] Eugene Kirman, Esq. Ext. 142 [email protected] Nicholas Karp, EA Ext. 118 [email protected] Jeremy Klausner, Esq. Ext. 130 [email protected] Dolores Knuckles, Esq. Ext. 109 [email protected] Nache Patoir Ext. 131 [email protected] Lawrence Sannicandro, Esq. Ext. 128 [email protected] Michael Wallace, EA Ext. 143 [email protected] Caren Zahn, EA Ext. 103 [email protected]
TAXPAYERS ASSISTANCE CORPORATION - OF COUNSEL
Desa Lazar, Esq. [email protected]
www.agostinolaw.com
May 2017
TAX COURT CALENDAR
NYCLA'S LITIGATION BEFORE THE UNITED STATES TAX COURT (PART I)
THREE (3) FREE NY & NJ CLE*, CPE†, and EA CE CREDITS
Tax Professionals that attend the seminar are encouraged to accept a pro bono tax controversy case assignmentfrom an ABA-sponsored Tax Court Pro Bono program or a NY or NJ Low-Income Tax Clinic
When Where
Tuesday, May 9, 2017
Registration & Sign-In @ 7:30 AM
Seminar 8:00 AM to 11:00 AM
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square37th Floor
New York, NY 10036
MODERATOR: Armando Gomez, Esq., Skadden
Panelists, include Part I Topics, include
Frank Agostino, Esq.,
Agostino & Associates
Understanding Notices of Deficiency & Notices ofDetermination
Sandy Freund, Esq.,
Rutgers School of Law
Pleadings in the Tax Court
Lyle Press, Esq.,
Associate Area Counsel, IRS Office of Chief Counsel
Best Practices for Informal & Formal Discovery andMotion Practice
Daniel Rosen, Esq.
Baker & McKenzie
The Stipulation of Facts
RSVP @ conta.cc/2o9LRBF
* This program has been approved by the Board on Continuing Legal Education of the Supreme Court of New Jersey for 3 hours of total CLE credit. Of these, 0qualify as hours of credit for ethics/professionalism, and 0 qualify as hours of credit toward certification in civil trial law, criminal trial law, workers compensationlaw and/or matrimonial law. This course or program has been approved in accordance with the requirements of the New York State Continuing Legal EducationBoard for a maximum of 3 credit hours.† Based upon our interpretation of the regulations by the New York and New Jersey State Boards of Accountancy, this event will qualify for CPE credit. Our NewJersey CPE Sponsorship number is 20CE00213700. Our New York CPE Sponsorship number is 002405. Our Office of Professional Responsibility Sponsor Numberis QVGWD.
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